The headlines from the recent Spring Budget were rightly dominated by the 2p decrease in National Insurance Contributions, given it will make a notable difference in workers’ take-home pay, even if obscured by other tax changes.
There were other commendable announcements, too, notably changes to child benefit charge thresholds and a focus on improving public sector productivity. Neither will transform the economy overnight, but they are useful starting points in areas that could eventually lead to huge economic benefits with further government action.
A key source of disappointment was the measures announced to support growth through investment and private sector productivity, which is the only real way to drive up people’s standard of living over the long term.
The issue doesn’t lie in the specifics of the support offered. Indeed, the various pots of funding and individual programmes announced all seem to be worthwhile and will no doubt be gladly welcomed by recipient businesses.
The problem with the announcements in the Budget is the disparate nature of the support offered. It seems to be the fiscal approach of this government to view all proposals for government funding on individual merit; the Chancellor even mentioned that in the future, they will prioritise those that deliver savings within five years.
So, what is wrong with this approach, you might ask? It is short-sighted and points to a lack of understanding about what drives investment decisions and, as a result, the most efficient way to support UK plc.
Businesses thrive on stability. Investment decisions rely on understanding the costs and returns involved. The more uncertainty around those calculations, the more risk attached and the less likely that investment will go ahead.
This assertion is backed up by evidence, including academic studies that find a strong negative relationship between CapEx and uncertainty over future policy[1]. My own research based on interviews with c-suite leaders of multinational manufacturers also found that policy certainty, alongside the long-term macro environment, are the two most important factors when deciding if, and importantly, where to invest[2]. This makes sense when considering the long investment cycles for the manufacturing sector in particular.
This research also found that the UK is generally not seen as a good place to invest, with a third of interviewees pointing to UK-specific factors leading to a loss of investment in the past eight years.
Not only have firms had to adjust to Brexit and the various changes in deadlines around its implementation, but there has also been a revolving door of governments and ministers, and therefore, several changes in policy priorities.
Add to this the public flip-flops on key infrastructure projects like HS2 and Heathrow, alongside delays in producing plans and frameworks on various issues such as hydrogen, biodiversity, and building hospitals; the UK is gaining a reputation that is inherently bad for winning investment.
This context makes it even more critical that the government uses policy as a signal to encourage investment. This will not be done through small pots of funding for individual pilots or projects. It requires an overarching strategy or flagship bill which gains traction on a global stage. Indeed, evidence proves that clear fiscal policy communication leads to a stronger investment response[3][4].
Other countries get this. The US Inflation Reduction Act (IRA) is already having an impact on green investment, providing an economic boost, even if the scale of related public spending can reasonably be argued as irresponsible. For instance, the IRA supported a 75% boost in solar investment in the US over the year to H1 2023 [5], while public comments from various CEOs point to a significant demand boost being felt across various manufacturing industries[6].
The government showed some appetite for an overarching strategy to encourage investment, launching the Ten Point Plan for a Green Industrial Revolution in 2020, but subsequently stepped away from these commitments. Compare this to the EU, which showed unusual agility in reacting to the IRA by announcing its own Green New Deal shortly afterwards, which included a softening in once-sacrosanct state subsidy laws to compete for inward investment.
Creating a new industrial strategy would help provide the long-term policy certainty businesses need to invest in areas of strategic importance.
The UK need not try to compete with the level of funding offered elsewhere or think that it is only about the headline public investment figures. Contracts for Difference’s success provides a clear example of the smart use of public funds. By guaranteeing energy prices to low-carbon energy generators, the model provides the certainty to invest.
Even the act of appearing to become more business-friendly alone could make a difference, given a correlation I found between the general sentiment of the UK market and the likelihood of the UK losing investment, as well as the reported importance of lobbying power as a factor in deciding where to undertake investment[7].
If the Chancellor really is serious about boosting UK productivity and long-term growth prospects, proving that ambition to global investors could be a self-fulfilling prophecy.
[3] Ricco, Callegari & Cimadomo (2016)
[7] ibid
For more information contact:
Christopher Breen, Head of Economic Insight
Email: cbreen@cebr.com Phone: 020 7324 2866
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.